WILL THE PENSION INDUSTRY ATTAIN FULL POTENTIAL?

Yes, when necessary measures are put in place and the right steps taken, argues Paddy Ezeala

The inflation rate is still in double digits; way above 17%. Combined with the continued nosedive of the naira, investors are their wits’ end as to how to navigate the situation. This is not the best of times globally. Most economic indices are pointing downwards in the face of a protracted global Covid-19 pandemic. Great economies are usually those that, among other things, have relatively high Gross Domestic Product (GDP) and solid financial cushion or at least inhere the capacity to conjure one when the need arises. But that has not been the case with Nigeria. Nigeria has had in addition to the pandemic a rising and seemingly intractable security challenges and internal schisms spearheaded by centrifugal interests. The summary is that the economy is shaken, unemployment and underemployment are at unprecedented levels. This situation is not helped by the overdependence on crude oil as the major export commodity.

Nigeria is currently at a critical juncture. It is either the right decisions are taken and the right things done or we take an irretrievable plunge economically. For decades, we have been hearing of the need to diversify the economy. It has almost become a cliché. But the truth of the matter is that economic diversification is not done by fiat and cannot be issued as a decree. There must be a well-laid-out plan to incentivize the development of non-oil sectors. In other words, investment in them must be made attractive and products therefrom internationally competitive.

This brings us to the challenges of infrastructure which is a major impediment to the diversification of the economy. The infrastructural deficiencies of the country are acknowledged and well-documented and the negative impact on productivity glaring. Our mineral resources would not have a competitive price tag if the cost of production remains prohibitive because of lack of basic infrastructure and necessary incentives. The same goes for agriculture which produce rots away owing to inadequate storage facilities. We should see infrastructure beyond buildings, roads, electricity, running water, etc. It should also include the necessary policy framework to drive growth.

Following the drop and/or volatility of oil prices in recent times and the concomitant large-scale funding gap in recent budgets, the federal government is obviously stretched and in fact stressed in its search for alternative sources of funding to bridge the deficit. Massive borrowing has continued which servicing has continued to put undue pressure on budget implementation. As it stands, huge capital projects are difficult to embark upon by the government without resort to external borrowing. What is the way forward?

As hinted above, great economies include those with huge financial backbone. The Contributory Pension Scheme (CPS) has the potential to provide the necessary financial cushion in our drive to build a solid economy beginning with addressing our infrastructural deficiencies. From a deficit of more than two trillion naira in the old defined benefit scheme before 2004, the CPS is closing in on N13 trillion in the amassment of pension funds even when a greater percentage of this is illiquid as pension funds don’t lie idle in bank accounts. This is even with far less than 10% market penetration in the pension industry. In other words, less than 10% of Nigerian workers in the formal and informal sectors of the economy have enrolled in the CPS. This explains the great potential and immense possibilities of the industry. While savoring the excitement generated by the remarkable success of the CPS, it is important to note the marked difference between it and the old defined benefit scheme. This is because the word pension in Nigeria has acquired a pejorative connotation as a result of the runaway corruption that characterized the old scheme and still persists.

While the CPS has been sustained for 17 years and is seen as a success, most Retirement Savings Account (RSA) holders, especially retirees do not see it as such. This is because they are not satisfied with the real value of their programmed withdrawal prompting an argument that it should be ‘dollarized’.

Why has the new Contributory Pension Scheme not attained its full potential? One of the reasons is that there is the tendency for inflation to over time erode the value of savings. Another is poor market penetration. The subnational tiers of government have been reluctant to key into the scheme. Some are not even up to date in the payment of salaries. While these tiers of government are quick to seek alternative sources of revenue, they see pension contribution for workers as additional burden; a liability. Assets under Management (AuM) in the CPS would have been triple the current figure if there were optimum participation by the various levels of government. Even more humongous would have been the figure if appropriate coercive measures were applied to fully drag in the private sector.

Interestingly, the various tiers of government have been eyeing the pension funds as a possible source of funding for infrastructure and other development projects. This includes some states that have yet to comply with the Pension Reform Act 2014, by putting the necessary structures in place and enlisting in the scheme. The federal government has yet to wield the big stick to bring every state and every worker into the scheme.

Also, for the CPS to reach its full potential, there must be an airtight policy framework for investment to ensure that risks are reduced to the barest minimum. Pension funds are held sacrosanct in view of the fiduciary relationship that exists between the RSA holders and the Pension Fund Administrators (PFAs). It should be reiterated that pension funds are well-positioned to play a critical role in economic development in Nigeria. However, excitement must give way to reason to ensure proper application of the funds. It is gratifying that the investment portfolio in the pension industry has since 2010 been diversified to allow investments in infrastructure funds and bonds as well as other asset classes such as supranational bonds and private equity funds. Before then, The National Pension Commission (PenCom) regulation on the investment of pension assets only allowed investment in ordinary shares, money market, corporate bonds and open-and close-end funds. All these are core asset classes.

The question now remains how funds in this subsector can be mobilized without the necessary prudential safeguards watered down or even compromised. The Minister of Works and Housing, Mr. Babatunde Raji Fashola advocated, sometime ago, the use of pension funds to address the infrastructural deficiencies of the country. This is being done, anyway. In fact, the minister stated that Nigeria should take the lead in Africa in using people’s funds to drive inclusive growth. Said he: “I see a future for Africa led by Nigeria, using the resources of the people to build a future that include the people.” Such optimism has been palpable not only in Nigeria but in other countries in Africa including South Africa, Kenya, Uganda and Tanzania, where pension funds are witnessing tremendous growth. But there are many issues for consideration and structures to be put in place before the desired results can be achieved.

It should be noted that PenCom has done considerably well in the regulation of the CPS; ensuring strict compliance with the ground rules of the industry as laid out in the Pension Reform Act 2014. An unswerving oversight mechanism has to be established to ensure all-round compliance not only with the policy framework for investment but also the actual rendition of the project. This is to guarantee the retirement of whichever instrument has been used in the investment. Also, regulatory approaches must be consistent.

It is also important to note that the investment of pension funds in infrastructure development requires some measure of capacity building to achieve the desired results. We have to shore up our expertise across the entire chain. We can achieve this through specialized training and collaborative efforts with countries that are way ahead of us in this regard. For instance, more than USD100 trillion is owned by institutional investors including pension funds in Europe alone. The Organization for Economic Co-operation and Development (OECD) is already sharing their Policy Framework on Investment with 30 countries including seven countries in sub-Saharan Africa while the Southern African Development Corporation (SADC) is working with OECD towards developing a Regional Investment Policy Framework.

With the necessary measures put in place and the right steps taken the pension industry will reach its full potential and provide the solid backbone required to jumpstart our economy beginning with massive infrastructural development.

Ezeala, a strategic and development communication specialist, is the Publisher and Editor-in-Chief of Development Agenda magazine